Why Borrowing From The Bank Of Mum And Dad Can Backfire In The Long-Term

Australia is in the midst of a housing affordability crisis. But is the "bank of mum and dad" the answer? Photo: iStockSource:Whimn

Home ownership might be the ultimate goal for many, but Australians who ask their parents for help to buy their first property are twice as likely to encounter financial stress down the track, new research suggests.

According to a report released from the Reserve Bank's economic research department using figures from the Household, Income and Labour Dynamics (HILDA), 30% of people who got loans from their parents to pay for a deposit found themselves in financial strain.

Of those, 20% would later ask for help from family and friends, Fairfax reports - twice the rate of those who manage to fund their deposit independently. More than 15% struggled to pay their power bills.

"While saving a deposit is a stretch, it is also a sign of financial discipline that is associated with fewer subsequent difficulties," according to the report, which surveyed 17,000 Australians.

New data released by financial comparison site Mozo.com.au shows that a third of home buyers' hopes of nabbing a property hinge on getting financial help from their parents, with most NSW buyers relying on close to $90,000 in aid from mum and dad.

The increasingly generous parental assistance has turned the "bank of mum and dad" into the nation's fifth largest lender behind the big four banks, Mozo reports. Two thirds of parents did not expect to be repaid and 9% delayed their retirement to help their kids.

NSW parents contributed almost $33 billion to help their children buy their first property - roughly half the $65.3 billion property aid parents gave to their kids nationally.

"Liar loans"

The findings follow a new mortgage survey carried out by investment bank UBS that suggests up to a third of Aussie mortgages could be "liar loans" based on factually inaccurate information.

The report indicates that Australian banks are vastly underestimating the risks of a housing collapse, with the financial system sitting on $500 billion worth of these so-called "liar loans" - which came to prominence in the US during the global financial crisis - sold to borrowers over the past 12 months who gave lenders false information in order to get a mortgage.

A quarter of all borrowers said they were "mostly" accurate, while almost 10% said they were only "partially factual" with their bank. Only 55% of respondents who took out a mortgage said their application was completely factual and accurate.

The figure marks a significant increase on the previous year, according to a 907-person survey, which UBS presents with a 95% confidence level.

False statements included saying they earned more than they really did, inflating the value of assets, and underestimating living expenses.

"While household debt levels, elevated house prices and subdued income growth are well known, these findings suggest mortgagors are more stretched than the banks believe, implying losses in a downturn could be larger than the banks anticipate," UBS said in the report.

UBS banking analyst Jonathan Mott said 26 years of unbroken GDP growth had led to "a large level of complacency within the economy" and that "more needs to be done" by banks to address the issue.

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